Jack in the Box Keeps Growth on the Menu

Jack in the Box (JACK -1.24%) reported second-quarter earnings after the market closed about a week ago, and Wall Street liked what it saw: The share price popped nearly 17% the following day. Same-store sales were up by 2.7%, revenue increased 18%, and management raised its guidance for the year.

In this segment from MarketFoolery, host Mac Greer and senior analyst Jim Mueller discuss what drove the restaurant chain's earnings beat, the headwinds that are holding it back, how it stacks up with competitors like McDonald's and Chipotle, and more. They also touch on the other unusual Jack in the Box news item of the week: a drive-thru worker who was caught serving customers barefoot.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on Aug. 8, 2019.

Mac Greer: Jim, let's close with a restaurant near and dear to my heart, Jack in the Box. Jack in the Box just flat-out getting it done. Shares up more than 13% on earnings at the time of our taping here. Same-store sales up 2.7%. They also increased full-year guidance. What do you think?

Jim Mueller: I think they're managing a turnaround pretty well. The revenue was up 18%, $222 million, just ahead of estimates of $220 million. $1.07 in adjusted earnings per share, ahead of $1.00 on the estimates. As you said, 2.7% or 2.8% depending on which number you're looking at, comps growth. That was almost exclusively on ticket growth, which means people are buying more when they're visiting. Traffic was right around flat. Not much growth in the people coming into the store.

If you want to compare other quick-service restaurants, McDonald's for instance, they reported 6.5% same-store sales growth. Chipotle, when they reported recently, a massive 10%. Jack in the Box has a way to go before they start knocking on the doors of those big guys there.

Greer: Did you do Jack in the Box as a kid? Did you eat at Jack in the Box?

Mueller: I did.

Greer: I love Jack in the Box! The tacos were just to die for.

Mueller: [laughs] I like their burgers. I wasn't enamored with their widely ranging menu and the quickness with which they turned over the menu items, trying different things.

Greer: They tried everything.

Mueller: Yeah, they tried a lot. And like Chipotle, they've had their own issues with food safety way back then. But, I like what I saw in the report. Restaurant-level margins are getting a bit tighter, unfortunately. That's primarily due to things like wages going up. But they're hardly the only one seeing that in this industry. Both Chipotle and McDonald's have also called this out as a source of concern. Inflation is basically heating up a little bit in the restaurant industry. Food prices are going up, commodity costs going up. They can pass some of that along with higher menu prices, and all of them have done so, I believe. But with Jack in the Box, you mentioned they raised guidance. They went from 0% to 1% range for the year. Now they're saying 1% or better on comps on same-store sales. That's part of why I think the stock is up today.

Greer: OK, Jim, you mentioned food safety. As I was preparing for the show, I googled Jack in the Box, expecting to see the earnings story at the very top. It was not. Instead, it was this headline. And I want to bring Dan Boyd in for this as well. The headline, "Jack in the Box Worker Caught Prepping Food While Barefoot." This is from Texas. We have a customer in Texas picking his food up at a Jack in the Box drive-thru. He notices that the employee working the drive thru window was barefoot. The customer takes a picture, calls the corporate office, and complains. So, here's my question. Jack in the Box aside, if you pull up to a drive-thru window and you notice that the person handing your food is barefoot, do you still eat the food? Take your time.

Mueller: I'd be really hesitant. A store management team that lets that happen might not be watching other things, like, are they washing their hands? Are they touching their faces and their hair and then not washing their hands before they start handling food? Do they go straight from the cash register to food prep? Cash is really dirty stuff to handle.

Greer: OK, you're really thinking this through. My first thought was, "They're not using their feet to prepare the food."

Mueller: Well, that's true, but it's possibly indicative of a bigger problem.

Greer: OK, Dan Boyd?

Dan Boyd: If I was going to a nice restaurant, maybe I'd care. But, like, you're going to Jack in the Box. You got to know what you're getting into. If they're barefoot, like, who cares? It's a Jack in the Box.

Greer: So you're eating the food.

Boyd: I'm eating the food, and I'm certainly not calling corporate to tattle-tale on somebody who's barefoot. Listen, there's only a few areas where barefoot is acceptable. The pool, the beach, somebody's home, or, I don't know, front yard, hanging out or something. Like, I don't think barefoot is acceptable at work. But I'm not about to call corporate about it. And if you don't want to eat there, just don't eat there. You know what I mean?

Greer: But you're saying, if you're going to eat there, then you have to accept the fact that --

Boyd: It's Jack in the Box! It's terrible for you! "Oh, there's going to be germs on my congealed grease! That's just terrible!"

Greer: OK, I am conflicted. To Jim's point, it makes me wonder what else could be going on. On the other hand, I love me some Jack in the Box, and if the food smells good -- I mean, if the food smells like feet, then forget it. I'm not eating it.

Boyd: If I'd already made the decision to eat at Jack in the Box, somebody having bare feet would not stop me from continuing to fulfill that decision.

Greer: OK, so, you're going to eat the food. Jim, it sounds like you probably are not eating the food.

Mueller: Probably not. But I really do have to wonder about that particular employee. Who wants to go ground barefoot in a fast-food restaurant kitchen? I mean, I've worked in fast food in the kitchen, and the floors are not clean.

Greer: That's true.

Boyd: And there's hot grease spattered around.

Mueller: There's all kinds of potential problems with, as you say, hot grease or a dropped knife or something. That employee is just really dumb.

Greer: I agree with that. I also think that if the food smells good, I'm still probably going to power through it. Dan, I think I'm with you.

Boyd: I'm glad you agree.

Greer: We'll take Jim's food.

Mueller: You're a fan of Cinnabon, right?

Greer: [laughs] Absolutely!